INVC NEWS
New Delhi – : In this article, we will delve into the proposed change in the formula for determining monthly pension amounts by the Employees’ Provident Fund Organization (EPFO). We will explore the potential impact of this change on pension calculations and discuss the ongoing discussions surrounding it. This update is crucial for individuals seeking information about pension reforms and the EPFO’s pension scheme. Let’s dive into the details and understand the implications of this proposed change.
EPFO Employees Pension Scheme, Pensionable Salary, and Formula
The EPFO currently operates the Employees’ Pension Scheme (EPS-95), which determines the monthly pension using a specific formula. The existing formula involves multiplying the pensionable salary (average salary of the last 60 months) by the pensionable service and dividing the result by 70. This calculation method has been in place for some time but is now under scrutiny as the EPFO contemplates a revision.
The Proposed Formula Change and Rationale
The EPFO is considering a significant alteration in the formula for calculating the monthly pension. Instead of relying solely on the average salary of the last 60 months, the proposed change suggests including the average pensionable salary received throughout the entire pensionable service. This adjustment aims to provide a more comprehensive representation of an individual’s earnings during their employment period. By encompassing the overall salary history, the new formula could result in adjusted pension calculations.
Current Status of the Proposal
It is important to note that this change is currently in the proposal stage, and no final decision has been reached. The EPFO intends to make an informed decision based on the report from the ‘Actuary,’ who will assess the pension, associated costs, and potential risks. Until the Actuary’s report is received and analyzed, the existing formula remains in effect.
Implications and Potential Impact
If the EPFO decides to implement the revised formula, it will affect the monthly pension amounts of all individuals, including those who have opted for higher pensions based on the current formula. This change could potentially reduce the level of competition among individuals seeking higher pension amounts. It is crucial for pensioners and prospective pension recipients to stay updated on the EPFO’s decisions and be prepared for potential adjustments to their pension calculations.
Understanding the Calculation Difference
To better comprehend the impact of the proposed change, let’s consider an example. Suppose an individual opting for a higher pension has an average salary of Rs. 80,000 for the last 60 months and a pensionable service of 32 years. Under the existing formula (80,000 multiplied by 32 divided by 70), their monthly pension would amount to Rs. 36,571. However, if the revised formula considers the average salary throughout the entire pensionable job, the monthly pension calculation could be lower due to the initial lower salaries during the early stages of employment.
Opting for a Higher Pension
In November of the previous year, the Supreme Court directed the government to provide subscribers with an opportunity to opt for higher pensions. The EPFO responded by introducing an online facility that allows subscribers to fill out a joint option form with their employers to select higher pension options. Initially, the deadline for this process was set for May 3, 2023, but it has been extended to June 26, 2023, providing individuals with additional time to make their decision.
Contributions and Subsidies
Currently, EPFO subscribers contribute a fixed amount of Rs. 15,000 per month towards their pension, even if their actual salary exceeds this threshold. By opting for the higher pension option, subscribers can potentially receive increased monthly pension amounts aligned with their higher salaries. It is important to understand the contribution structure, where employees contribute 12 percent of their salary to the EPFO’s social security scheme. Out of the employer’s 12 percent contribution, 8.33 percent goes to the Employees’ Pension Scheme (EPS), while the remaining 3.67 percent is directed towards the Employees’ Provident Fund.
Government Subsidy and Financial Considerations
The government provides a subsidy of 1.16 percent for the Employees’ Pension Scheme based on a limit of Rs. 15,000 for the basic salary. Concerning the need for the formula change, it is believed that providing higher pensions over an extended period could pose a financial burden. This consideration is one of the driving factors behind the proposal to revise the formula. It is essential for stakeholders to understand that the substantial funds held in the Pension Fund, amounting to Rs. 6,89,211 crore as reported in 2021-22, are not exclusive to pensioners. These funds belong to all shareholders associated with the EPFO and its employees, and the EPFO’s responsibility is to prudently manage and allocate these funds.
In conclusion, the EPFO’s proposed change in the formula for determining monthly pension amounts has generated significant discussions and considerations. While the final decision is pending, it is essential for individuals to stay informed about the ongoing developments. The potential impact of the revised formula on pension calculations emphasizes the importance of understanding the implications for current and prospective pensioners. By staying updated and making informed decisions, individuals can navigate these changes effectively.
